How management companies work in private funds

For general partners in private equity, establishing the right legal and operational framework is fundamental. A core component of this structure is the management company, the entity responsible for running your investment firm. This article will cover its key responsibilities, its typical legal setup, and its critical role in providing a liability shield and ensuring audit readiness.

What is a management company?

A management company (or manco) is the legal entity that fund managers create to serve as the operational and financial hub of their firm. This entity is legally and financially separate from the fund itself, which is the vehicle that is established by a general partner (GP) and holds capital from limited partners (LPs).

This separation is a cornerstone of professional fund management. The management company is the firm that operates the business across multiple funds. Each fund is a "client" of the management company, which serves as the investment adviser. While the management company is the business account used to pay for the firm's expenses, such as salaries and rent, the fund is a protected entity. It uses its capital solely for making investments into portfolio companies as part of its overall portfolio management strategy.

The management company earns its revenue by charging the fund a management fee. This fee is usually a portion of the total capital the fund manages, paid as an annual fee. For special purpose vehicles (SPVs) that charge this fee, the most recent Carta data shows a growing standardization, with the middle 50% of SPV management fees falling between 1.5% and 2%. The management company then uses this revenue to cover all of its operating costs.

How a management company differs from the fund

To understand fund operations, it’s helpful to see the distinct roles of the management company and the fund. While they work together, their purpose, structure (often defined in a limited partnership agreement (LPA) for the fund), and sources of capital are entirely different. The management company provides investment advice and operates the business, while the fund executes the investment strategy through a process known as portfolio construction.

This clear division is what allows a private fund to function professionally and maintain its structural integrity.

What are the core responsibilities of a management company?

The management company is responsible for the investment and non-investment work that keeps the firm running. For a fund's chief financial officer (CFO) or controller, overseeing these functions through proper fund administration is a high-stakes process where accuracy and timeliness are paramount. These duties fall into two main categories: 1) executing the investment strategy and 2) managing the firm's finances and upholding its compliance obligations.

The front office and back office

The management company has both a front office and a back office. The front office handles investment activities, such as scouting for deals and meeting with founders. The back office manages the firm's operational side, including its finances and compliance.

The financial engine of the management company is the management fee it collects from the fund—a critical function in a market where global private equity deal volume increased 22% in a single year, placing greater demands on operational controls as firms scale. The management company then uses this revenue to pay for all the firm's operating expenses. Managing this flow of money is a primary responsibility that requires careful tracking and reporting.

Common expenses the management company pays include:

• Salaries, bonuses, and benefits for the partners and employees

• Rent and utilities for office space

• Subscriptions for software, data services, and research tools

• Legal, accounting, and other professional service fees that aren’t attributable to the fund

• Business development and travel costs

This level of detailed financial management can be a significant challenge.

• Manual reconciliation: Many firms track expenses in spreadsheets and manually match them to bank statements. This process is often slow, prone to human error, and can create significant delays in producing accurate financial reports.

• Integrated operations: A modern approach connects the firm’s finances on a single platform. With Carta Fund Administration, the general ledger becomes the central source of truth, automatically updated with every transaction for real-time visibility into the firm's financial health.

The general ledger (GL) is the complete, official record of all financial transactions of the management company.

Upholding compliance and reporting obligations

Staying compliant requires navigating a dynamic and constantly evolving regulatory landscape.

• Regulatory filings: This can include Form ADV, which provides information about the investment adviser and its business practice.

• Employment law: As the employer of the firm's staff, the management company must comply with all federal and state employment laws. This includes managing payroll, benefits, and employment agreements.

• Audit preparation: The management company must maintain its own books and records, which can be prepared for an annual audit if required by investors or firm policy. This is separate from the audit of the fund itself and confirms that the management company's finances are in order.

Why is a management company necessary for fund operations?

Establishing a management company is a strategic necessity for protecting the partners, maintaining the trust of investors, and supporting the long-term viability of the firm. Without this structure, running a professional investment firm would be nearly impossible.

Creating a liability shield for fund managers

One of the most important functions of a management company is to provide a liability shield. The decision to form a limited liability company (LLC) is a structural choice. This concept, which originates with the corporation structure, is sometimes called the "corporate veil."

This legal protection is a fundamental reason why this structure is the industry standard.

• Protection from business debts: If the management company takes on debt, such as a line of credit, the lender can only seek repayment from the LLC's assets, not the personal assets of the partners.

• Protection from lawsuits: If the firm were sued for breaking an office lease or in an employment dispute, the lawsuit would be against the management company LLC. This shield protects the personal homes, cars, and savings of the partners.

Without this shield, every business risk the firm takes would also be a personal risk for the fund managers individually.

Ensuring financial integrity and audit readiness

Separating the fund and management company creates clean, distinct financial records. This is essential for proving the firm is upholding its fiduciary responsibility: the legal and ethical duty to always act in the best interest of its investors.

Mixing fund money with management company money, known as commingling funds, is a major red flag for investors and auditors. It creates the appearance of impropriety and makes it impossible to verify that the fund is using LP capital for its intended purposes.

This separation also streamlines the fund's annual audit process, which is critical when investor scrutiny is high. A platform with a dedicated auditor portal, which functions like a secure virtual data room, makes this even easier by providing secure, view-only access to all required documents, resulting in a faster, less disruptive audit.

How are management companies structured?

The legal and economic architecture of a management company is designed for liability protection and operational clarity. For emerging managers, services like Carta Fund Administration can help you get this setup right from day one. The structure is straightforward but has critical components that must be in place.

The role of the LLC

The LLC is the standard legal entity for a management company in the U.S. It offers the liability protection of a corporation with the operational flexibility and tax advantages of a partnership. This means the business itself doesn't pay income tax; instead, profits and losses are "passed through" to the owners to report on their personal tax returns.

The formation process involves filing key LLC organizational documents with the state where you are forming the LLC and appointing a registered agent in the state if you don’t otherwise have a presence there. A registered agent is a designated person or company that agrees to receive official legal documents on behalf of the LLC, such as being served a lawsuit. 

Defining ownership and economics in the operating agreement

The operating agreement is the internal governing document for the management company's LLC. This agreement is critical because it outlines the ownership stakes, roles, and responsibilities of each partner.

Creating a comprehensive operating agreement upfront helps prevent future disputes and makes sure all partners are aligned on how the firm will be run. A well-drafted operating agreement should clearly define:

• The percentage of the management company each partner owns

• How profits will be distributed among the partners

• The roles and responsibilities of each partner in running the firm

• The process for making major decisions, including voting rights

• How to handle a transfer of LLC ownership when a partner wants to leave the firm or you bring on a new partner

Management company vs. holding company

It's common for people to confuse a management company with a holding company, but in private funds, they serve very different purposes. Understanding the distinction is key to grasping how investment firms are structured and how they operate.

A management company is an active, operational business. Its purpose is to provide professional services, specifically investment management, to a fund in exchange for a fee. It has employees, expenses, and day-to-day business activities.

A holding company, by contrast, is a passive entity. Its primary function is to own assets and it does not engage in day-to-day operations. Think of it this way: A property manager who is paid to run an apartment building is like a management company. The person who simply owns the building and collects the profits is like a holding company.

Modernizing the management company with Carta

The traditional management company often runs on manual processes, spreadsheets, and disconnected systems. Modern firms, however, run more strategic financial operations by connecting their management company and fund accounting on a single platform built for private capital.

Carta's manco administration software provides this complete financial picture. By connecting banking, expense management, and accounting for both entities into a single source of truth, it provides the clarity and control that fund CFOs and controllers need to operate with confidence. This unified approach delivers:

• Firm-level financial clarity: You can see context across all your entities and track intercompany balances automatically, eliminating the need to switch between systems or reconcile conflicting ledgers.

• Operational efficiency: Routine workflows are automated to free up your team for more strategic work. With native bill pay and an AI-enabled engine that automatically reconciles cash transactions, you can close the books faster.

• Confident financial planning: You can make more informed decisions with precise forecasting and detailed spending analysis. Build a budget in minutes and easily compare it against up-to-date actuals to gain foresight into future quarters.

See how an integrated platform can help your management company fulfill its core responsibilities with accuracy and efficiency—request a demo of Carta Fund Administration.

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Frequently asked questions

What is the difference between a management company and a fund administrator?

The management company is the investment firm itself, owned and operated by the fund's managers. It may hire a specialized third-party firm, like Carta, for fund administration to handle the fund's complex accounting and reporting.

Do solo general partners need a management company?

Yes, even a solo GP should form a management company. This structure provides the same critical liability protection and operational separation that larger firms require and is considered a best practice regardless of the firm's size.

What are typical management company expenses?

A management company’s expenses include all the costs of running the firm. These costs commonly include salaries and benefits for the investment team, office rent, technology subscriptions, and business-related travel. Other costs, such as legal and accounting fees, may be paid by the management company or the fund itself, as determined by the fund's legal agreements.

How does the management company receive carried interest?

Carried interest is the investment manager's share of the fund's profits, not an operating expense. Therefore, it is paid to a separate, pass-through entity (not the management company), which is funded by management fees. The proceeds are then distributed to the individual partners according to the fund's distribution waterfall.